Australia's health workforce — a future looking perspective

Speech

Chair Michael Brennan delivered the John Deeble Lecture on 26 October 2022.

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Michael Brennan delivering the speech quoting: Today as much as ever, we need health policy thinking that is rational, fearless and prepared to grapple with big realities.

It may sound trite, but it has to be said: it is an enormous privilege to deliver this talk in honour of John Deeble.

John Deeble represents the best in Australian public policy: elite intellect, clear sighted commitment to evidence-based policy and a preparedness to think big. Perhaps most important of all, an unwavering commitment to the public good.

Many of you knew John through various institutional connections: the AHHA and Deeble Institute; the Australian Institute of Health and Welfare; the Department of Health; the Melbourne Institute and the Peter Mac.

I did not. But what I can say is that John was well known to the Productivity Commission, having participated actively in a number of the Commission’s projects, via formal submissions and other inputs.

Some weeks ago, a colleague of mine approached me in the office kitchen. He heard that I would be giving this talk. He told me about the lasting impression John had made on him, when providing input on a Commission project back in 2012 which compared the efficiency of public and private hospitals.

John made a formal submission — still there on the public record — following the publication of our draft report. It was, as you would expect, strong on technical detail and in-depth knowledge of the sector. What is more striking is the tone: it was educative in the best sense — pointing out where our analysis could be sharpened, and our estimates improved.

He was a giant; and we, mere mortals; but he couched his suggestions in a way that was supportive and encouraging. My colleague recalled talking to John on the margins of one of our public hearings and had quite a lengthy chat about health policy. He said this about John:

[John] was willing to discuss the economics of Australian healthcare with me personally, and I really appreciated that at the time. In this way he was an inspiration — soon after this work, I went and started a Masters of Public Health in order to further my understanding.

John’s policy legacy is well known, but there was clearly something more. In his humility and his generosity, he inspired other young policy officers — creating a multiplier effect of inestimable value.

Today as much as ever, we need health policy thinking that is rational, fearless and prepared to grapple with big realities: the aftershocks of COVID, demand pressures from an ageing population and supply pressures due to workforce issues.

As if that wasn’t enough, I wish to add one more: the slowing of productivity growth in Australia and much of the developed world. I want to put to you that this is an issue with significant bearing on health policy that warrants our attention, particularly in the context of health workforce issues. [I can sense some groans — yes, productivity growth can be a dry topic, but let me try and put it on a larger canvas.]

For the last 200 years, in western Europe and in the European community in Australia and North America, living standards rose at a rate unprecedented in human history. As our own recent interim report states, this rapid advance came as a result of the:

… ongoing discovery and spread of new, useful ideas. Some took the form of new technology — like electricity or antibiotics. Others were new business models like mass production or ride sharing. Still others were institutional innovations like accounting standards, capital markets or free trade.

The change was felt across all sectors of the economy: agriculture, transport, manufacturing, retail and, of course, health. Two of the most significant gains of the late 19th and early 20th century were the dramatic fall in infant mortality and death from infectious diseases. We sometimes describe this as the output (or outcome) of the health sector — I have described it in that shorthand — but that is not entirely right.

Not all of the improvement in health outcomes can be attributed to the ‘health sector’ per se. Much of it was unrelated to increased public or private spending on doctors and hospitals: some of the major contributors were things like clean running water, sewerage systems and refrigeration.

But it is true that the practice of medicine was also transformed, from a state (say) 250 years ago based on what could be described as folk remedies and localised quackery, into a profession (or more accurately a group of professions) which more closely cohered around scientific disciplines and rigorous training.

Hospitals were transformed from places of infection and disease towards their modern status as places where advanced medicine is performed; illnesses treated and cured.

A broad, stylised fact is that the advances in health largely came in the form of improved quality — better health outcomes, longer life expectancy, less pain, fuller lives — rather than reductions in cost.

Whereas the productivity growth in several other industries, including agriculture and manufacturing, saw a dramatic fall in the real cost of producing the everyday goods that households purchase largely via a reduction in the amount of labour required to produce increasing amount of output.

We have estimated that in 1901 a bicycle would cost the average worker 473 hours of labour at the average wage. Today it would take just six hours. This is a very stark demonstration of the way productivity growth can lead to dramatic cost reduction in common items for the average person, albeit over a long-time horizon.

Wherever that happened — wherever less labour was required to produce basic household goods — there has been a tendency for employment to shift toward other sectors, satisfying other human wants and needs.

Agriculture employed a quarter of the workforce in 1900, compared with less than 5 per cent today. The trajectory in services (including health) went in the opposite direction. This is one of the big economic stories of the last several decades: the steady shift of employment into the services sector, with health leading the way. We can attribute this to a change in people’s preferences, but that isn’t the whole story: partly it reflects cost reductions in other parts of the economy.

Australia’s economy is now 80 per cent services; and 90 per cent of employment is in service industries. To be a high-income country today requires a high productivity service sector. Future productivity and income growth relies more than ever on productivity growth within the services sector. And that turns out to be a significant challenge.

It’s not just that productivity growth is a less intuitive concept in many services than it is in goods sectors like agriculture, manufacturing and mining, though that is true. It is also that many of the forces the drove productivity gains in those goods industries — large scale substitution of labour by capital, mass production and economies of scale, cheaper energy — are, on the whole, likely to be less applicable to services.

Many services are delivered in person. They are often bespoke by nature and there is an important sense in which they are ‘co-produced’ between the provider and the consumer. Even in health, much of the innovation that does occur is on what one might describe as the manufacturing or R&D side of the business: the new drugs, devices and equipment and diagnostic tests. Less so on the service side: new business models or configurations of service delivery.

The health sector is a leading-edge innovator when it comes to medical technology; less so when it comes to the use of general technology (say digital communications or data analytics) to support innovative new business models. This is likely to be part of the reason that health innovation tends to be quality-enhancing rather than cost-reducing on average.

The Inter-generational report tells us about the cost pressures that we face on the demand side: due in part to an ageing population, with forecast health spending by the Australian Government to increase by about 1.6 percentage points of GDP from 2021‑22 to 2060‑61. State and territory spending will add further pressures on government spending, probably by an additional 1 percentage point.

This collectively may not sound like much, but for the Australian Government alone these pressures amount to an estimated $800 billion of additional spending over this period in constant 2020-21 prices.

But there is another truth that is much less well understood: namely that a similar cost pressure operates on the supply side. It goes like this: when productivity growth in the economy is uneven — with some sectors finding ways to reduce real costs rapidly and others less so or not at all — then (perhaps ironically) it is the sectors with low productivity growth that end up comprising an increasing share of employment and nominal GDP.

This is the phenomenon known as cost disease. In many ways a market economy operates to transfer resources in a positive way: to those firms and activities which are most efficient, offer the highest quality at the lowest prices and innovate to do so. But the cost disease story highlights another tendency: in the face of uneven productivity growth, resources (notably labour) flow to those sectors with relatively slow productivity improvement.

Unless that pattern changes, economy-wide productivity growth can face ever increasing headwinds. As economist Charles Jones put it:

Economic growth is determined not by what we are good at, but rather what is essential but hard to improve.

In Australia, the non-market sector (comprising health, social assistance, education and other public services) has increased its share of employment (hours worked) from 20 per cent to 25 per cent in the last two decades. Much of that growth has been in the last 12 years.

If that growth continued unabated out to 2060, the non-market share of employment could get closer to 40 per cent. It would almost certainly intensify our current workforce shortages and fiscal pressures.

Of course, productivity growth in the non-market sector is not zero across the board. But it is notoriously hard to estimate; outcomes can be somewhat intangible or hard to observe, and quality is often the main dimension of improvement, and it can be highly subjective.

There are ongoing advances in health. And medical technology promises yet more: the expanding role of wearable technologies, genomic sequencing and broader applications of messenger RNA for instance. But it is hard in health to know whether those advances (measured in better quality health outcomes say) are being achieved faster than the growth in inputs.

In other non-market services, like school education, it is harder to make the case that there has been productivity growth over the last two decades. The main path out is to achieve some productivity growth in the non-market sector itself; and to complement quality improvements with some real cost reduction where possible.

None of this is easy, but in many ways, it represents one of the big economic challenges of our day. Two observations stand out.

First, the unevenness of productivity growth can be overcome via general purpose technologies — those that have broad application, like digital technology or AI, for instance. It means that when such technological waves come along, we need all sectors to put that technology to good use.

Second, in those services, like health, which rely heavily on a highly skilled workforce, it is vital that the workforce be well deployed — to maximum efficiency and effectiveness. Not least because where technology (whether health-specific or general) is introduced, it tends to change job design and, in extremis, the role of a particular profession. If we stick rigidly to existing occupational contours, we will miss opportunities.

We should look at these issues through a positive lens: there are worthwhile opportunities in healthcare and a major role of the workforce in achieving those.

Let’s start with something subtle about health care quality — the word ‘patient’. It’s an interesting word that suggests something about our expectations of people using the system. The Commission has estimated that the avoidable hidden costs of just waiting in doctors’ offices amount to about $1 billion a year.

A US clinician summed up an alternative approach with a provocative title to his book: ‘The Patient Will See You Now’. That idea brings into focus the much broader issue of person‑centred care and how the health workforce’s attitudes to people can improve outcomes and experiences.

Measurement of performance of the healthcare system is one crucial aspect of this centredness, hence the growing importance of PREMs and PROMs.

But little things matter to change how a healthcare workforce interacts with people. In the Commission’s study of innovations in care for chronic health conditions, the Perth homeless Healthcare Team established a patient reference group, comprising people experiencing homelessness — an incredibly vulnerable and disadvantaged group — to give their views on the most effective ways of providing services to them and to help plan new services.

One 265 bed community hospital took the concept of a person‑centred approach to heart. It looked at every feature of their operations from a consumer perspective. Leadership from all of its workforce was critical, with a person assigned to focus the workplace culture on person-centred care. Patients, their families and the community are now involved in the governance of the hospital. Throughout the hospital, large posters urge patients and family members to ‘speak up, ask questions’.

The key lesson is that a healthcare workforce’s skills go well beyond purely clinical dimensions. In a way, this hospital’s model of healthcare expanded its workforce to include the people it served. Taking to heart that earlier point about co-production between the producer and consumer of a service.

In some other service sectors — notably retail — the path of innovation and progress has involved bringing the consumer more and more into the ‘production’ process. First by having the customer walk the aisle and pick their own goods from the shelves. More recently by having them scan items.

This role of the ‘patient’ is explicitly being used via the increasing role of peer workers in mental healthcare. Peer workers can be particularly useful for some groups who find it hard to engage with mainstream services, such as those in the LGBTIQ community.

Technology may also give the patient greater scope to take charge of their own healthcare needs, with a reduced role for an omnipresent healthcare worker. This approach means scarce healthcare workers can help more people, an outcome that is particularly valuable in regional and remote areas where labour shortages seem particularly severe. It also offers the potential to reduce burnout and stress on harried health workers and can promote better outcomes for patients.

The technology does not have to be complex. The Commission recently examined an automated SMS‑based persona — charmingly named as Nellie — to promote self‑care for people with chronic conditions. It is used widely by the South‑Eastern Melbourne Primary Health network to great effect. Nellie is highly versatile. Some GPs used for remote monitoring of blood pressure; others for promoting increased physical activity.

A good example of the more sophisticated use of consumer‑led technology is the use of online services for the treatment of mental health conditions, particularly cognitive behavioural therapy for people experiencing affective disorders (depression and anxiety).

In the Commission’s inquiry into mental health, we found that supported online treatment was highly effective for many people. Meta analysis showed that online treatment was not inferior to face‑to‑face care, and when compared with clinician‑alone services, had more uniform results.

It promotes large productivity improvements for mental health workers. For example, THIS WAY UP found that clinicians only used 10 minutes per fortnight for supported online treatment compared with 1 to 2 hours for face-to-face treatment, because in the online service the practitioner’s time is being complemented with other content and interactive tools.

There is a quality and a convenience dimension too. Like all workers, healthcare workers having varying proficiency; software does not. Software can’t do everything, but where is has efficacy, it can provide a consistent quality of service.

Online approaches also address some of the concerns about stigma in face‑to‑face models of care. It is available throughout Australia and at times when normal services would never be available, such as between 6 pm and 10 pm and can be provided at low cost. In some instance, no referrals are required, and the person can interact anonymously. Even some standalone (unguided or non‑supported) CBT services through smartphone apps have been shown to be effective.

A degree of self-service, for some types of healthcare, provides scope for the consumer to be in charge. It won’t suit everyone, but it will suit many.

In other cases, technology might largely be about assisting clinicians. For example, there seems to be promise in model-informed precision dosing, which software is good at. Similarly, artificial intelligence algorithms can support radiologists in identifying abnormalities in radiological images. Google has shown that computers can perform well in examining retinal images of diabetics (who are at high risk of ophthalmic disorders).

These are opportunities, not threats. For the most part, technology tends to replace tasks rather than jobs. Hence it augments skilled labour rather than superseding it. But it does allow humans to focus their efforts and attentions on those uniquely human skills like judgment, synthesis of complex information, empathy and innovation.

So, technology can play a significant role in person‑centred care, and in substituting low for high‑cost services.

There are other substitution possibilities that rely on expanding the scope of practice of the healthcare workforce broadly defined. Unwarranted scope of practice restrictions add to costs, reduces people’s access to treatment, and constrains choice.

Stephen Duckett has rightly called the use of highly qualified practitioners for activities that require much lower qualifications as ‘squandering skills in primary care’. He found that for a wide range of workforce groups, more than 90% saw scope for some workforce substitution. That substitution can be to a practitioner with lower skills. For instance, about 30 per cent of enrolled nurses thought they could shift some of their workload to cleaners. And satisfaction rates for healthcare workers would no doubt rise if they can avoid performing tasks that could be done by someone less qualified.

There appears to be significant and excessive caution about widening the roles of some healthcare workers. How far substitution can go relies on clinical evidence rather than intuition, and certainly should not be informed by what has been referred to as ‘protected titles’.

The arbitrary nature of allowable scope of practice across developed economies, or even within them is telling. In California, nurse practitioners are recognised as primary healthcare providers, but must be supervised by a physician, while Oregon and Arizona have no such requirement. A large‑scale study by the Federal Trade Commission on outcomes in US jurisdictions that required physician oversight and those that did not, found that the unrestricted model of care had no adverse impacts on the quality of care and indeed some health benefits for Medicare beneficiaries.

The scope of practice of the community pharmacist is one of the most contested areas. The COVID‑19 epidemic saw pharmacists performing a key role in population vaccination, and they have proved their effectiveness in a range of other areas, such as opioid treatment. Some in that profession have sought wider roles in healthcare, such as embedding pharmacists in aged care facilities to better manage medications, and even more controversially, to divert non‑urgent hospital emergency department presentations to pharmacists. Some obvious caution would be required before implementing the latter.

As much as some would argue for a bigger responsibility for community pharmacies, the existing model has many undesirable features, most particularly their unique role in the health care sector as retail outlets that sell notionally therapeutic goods with proven lack of efficacy, as well as many unjustifiable regulatory constraints on competition and prescription price discounting.

One attractive option is to extend the potential for pharmacists and other allied health professionals to play a bigger role in multidisciplinary care teams under integrated health care models. That said, a health system should not be about desperately seeking roles for its workers if there are better options. That will mostly just be about changing the tasks performed by the workforce, diverting them to others.

There are other forms of substitution between healthcare workers that the Australian healthcare system should aspire to accelerate. The hospital system is the monster of the healthcare system, accounting for about $84 billion in 2019‑20. One can throw in about $5 billion of loose change for MBS and PBS services delivered in hospitals. There is a great deal of scope for shifting activity from hospitals to primary healthcare through better management of chronic diseases, including more coordination between primary and tertiary care. And that means that general practice and other primary forms of care — and their associated workforce — should play a bigger role.

As an illustration of outcomes, in its first two years of operation, the Bunbury Hospital Chronic Conditions Care Coordination Service in Western Australia saw a 56% reduction in emergency department presentations, a 16% fall in the length of hospital stay and savings of more than $1.5 million in avoided costs for people enrolled in this service.

None of these hospital avoidance measures will have immediate impacts on hospital costs, which will ultimately come from being able to delay the building of new hospitals and from reducing ongoing labour shortages. But the benefits for patients — rather people — will be felt a lot sooner.

Funding models clearly play a role. Pecuniary incentives aren’t everything, but they do matter. And when we pay for primary care on the basis of time spent, or for hospital care on the basis of activity, we miss out on some opportunities for improvement.

Activity‑based funding in hospitals was an important reform. It strongly encourages hospitals to be efficient in their activities. But it does not pay a hospital to reduce its activities by managing care better or by making investments in primary care. We know that in general practice, fee-for‑service encourages high throughput, but it also encourages services.

In conclusion, there is much complexity in a system. More so when it’s the health system. There is no single magic wand; no policy lever that, of itself, creates the necessary change. Large scale system architecture is part of the story, but only part.

We will continue to work within the broad policy structure that John Deeble envisioned. But within that, we will have to continue the quest for funding models that better align practitioner incentives with the public good and free up some room for genuine service innovation.

We need to think hard about the funding role of our private health insurers and, for that matter, life insurers, in the suite of patient-centred and preventative care. And, as mentioned earlier, the role of community pharmacy in the mix. We also need to foster and support a cultural shift — towards more integrated care, less siloed and more team-based, centred around the patient.

Nowhere is that patient-centred approach more salient than in relation to Aboriginal and Torres Strait Islander health, where Aboriginal and Torres Strait will legitimately demand a culturally safe environment — both in using health services, but also working in them. This is fundamentally important to closing the gap on health outcomes. So, growing and developing the Aboriginal and Torres Strait Islander health workforce is a high priority.

We will need a system with fewer boundaries, including those created by the Federation; one that makes use of practitioners’ full scope of practice. We will increasingly rely on informed and empowered consumers, supported by technology, both medical and general. New data (like PREMS and PROMS) and use of existing data will be central to that endeavour. We will need to showcase innovation and success stories where we find them.

Finally, we will need a bit of the ethos of John Deeble. That commitment to the public good: robust policy analysis aimed at meaningful real-world outcomes, with a passion for bringing others along.

I opened with a mention of John’s interactions with the Productivity Commission — just a tiny fragment of his life’s work in public policy. The submission he made to our study, having pointed out the technical gaps in our work and highlighted where improvements could be made, concluded thus:

The comments set out here are not advanced as criticisms, only proposals that might lead to better and more understandable results. The Commission’s report is a very important one on a difficult and complex subject. It is to be congratulated on what has been achieved in a very short time.

That paragraph alone tells us a great deal about why John Deeble had the influence he did: on policy and on people.

Opening statement

15 September 2023

Deputy Chair Alex Robson delivered an opening statement to the House of Representatives economics committee inquiry into promoting economic dynamism, competition and business formation.

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Competition, dynamism and productivity (PDF 191 KB)

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Thank you for the invitation to appear again before this Committee, and for the opportunity to make an opening statement.

When we last appeared before this Committee, our Advancing Prosperity ¹ report had not yet been publicly released, so today I will spend a bit of time discussing that. I will also discuss some recent productivity trends, the relationship between productivity and real wages, and some trends in indicators of market dynamism as set out in our submission. I will conclude by touching upon the topic of competitive neutrality.

My main messages today are as follows:

Australia’s productivity performance has been anaemic for quite some time.
Productivity growth is a key driver of real wages growth.
Competition and business dynamism are, in turn, important drivers of productivity growth.
Several aggregate indicators suggest that competition and dynamism in Australia may be declining.
However, these aggregate indicators should be interpreted with care, particularly when it comes to the menu of policies that might address those trends, and the tradeoffs that might be involved.
There is no single policy silver bullet in relation to competition, dynamism and productivity.
A comprehensive microeconomic reform agenda – of the kind outlined in our recent Advancing Prosperity report – is needed.
Finally, we consider there is scope to improve Australia’s Competitive Neutrality policy and make it fit for purpose for the years and decades ahead.

Recent productivity trends

In March this year we released our 5-year productivity report, Advancing Prosperity. The report emphasised the fact that over the decade to 2020, Australia’s productivity growth averaged just 1.1% per year – the slowest growth rate in 60 years.

Since that report was released, there have been several disappointing data releases on productivity. The recent data underscores our earlier key messages.

For example, the most recent National Accounts data from the Australian Bureau of Statistics shows that over the year to June, Australia’s level of productivity went backwards, declining by 3.6%. ² That data also shows that productivity has declined in four of the last five quarters. As a result, GDP per hour worked is now at its lowest level since March 2016.

The outgoing Governor of the RBA recently warned that Australia’s living standards could stagnate in the face of our weak productivity performance. ³ Another view is that on current data trends, we would be lucky to achieve stagnation – it could turn out be another optimistic, “glass half full” prediction from the former Governor.

My own view is that Australia’s productivity challenge is urgent – but it did not happen overnight. It has been an urgent problem for many years. We can and must do better, but there is a way forward.

Productivity and real wages

Why does it matter? Productivity is about working smarter – not harder or longer. The recent data underscores this.

If the level of productivity is falling – as it has been over the past year – this means that on average, Australians had to work more hours just to produce and buy the same volume of goods and services.

In other words, over the past year, Australians on average have been working harder and longer – in effect, running to stand still. Real wages have also been going backwards, and this is no coincidence. Indeed, one of the very first findings in Advancing Prosperity is that in Australia, almost all sustained increases in real wages are underpinned by improvements in labour productivity growth.

Productivity Commission research released today ⁴ confirms this. This research examines so-called ‘wage decoupling’ – defined as average annual labour productivity growth minus average annual producer wage growth. We find that since 1995, only two sectors have exhibited strong wage decoupling: mining (4.9 percentage points) and agriculture (3.4 percentage points).

These two commodity-exporting – and highly productive – sectors account for just 4% of total employment, but around 18% of total value added. They therefore have a disproportionate impact on economy‑wide estimates of wage decoupling.

If we strip them out and examine the rest of the economy, average decoupling since 1995 has been just 0.1 percentage points. And in more than half of the sectors outside of mining and agriculture, decoupling was zero or negative.

In other words, since 1995 the wages of over 95% of Australia’s working population have risen very closely in line with productivity. And the average income gain from a productivity lift is more than eight times the potential gain from eliminating the limited decoupling across most of the economy. So productivity growth remains the main policy game.

Indicators of market dynamism

Given this, what should we do about our weak productivity performance? This committee is rightly focused on competition and market dynamism. ⁵

In a market-based economy like Australia, it is reasonable to expect that there would be a close link between competition, dynamism and productivity.

Business decisions are driven by the pursuit of profit and the avoidance of losses. Market prices guide those decisions, and are “a signal wrapped up in an incentive”, providing information to businesses about hiring decisions, where it invest, what to produce, how much to produce, when to sell it, where to sell, and to whom.

Well-functioning markets and healthy competition between businesses lead to lower prices, higher quality goods and services, greater consumer choice, and ultimately higher living standards.

However, if competitive forces are dulled or distorted, this can lead to incorrect price signals being provided, and poor outcomes for consumers and workers.

Australia’s economy and our markets are changing. Markets for services – which tend to be relatively labour intensive – now dominate, with 80% of activity and 90% of employment now in services. And many services are delivered without benefit of either the signal or incentives of markets. In many instances, labour is the service – think of health, aged care and disability care.

I will return to these points a bit later.

Our submission to this inquiry ⁶ focusses on a range of data which are proxies for market dynamism: firm entry and exit, concentration, price-markups, labour market mobility and investment.

Let me highlight some the key points of our submission in relation to these proxies.

While aggregate firm entry and exit rates can be an indicator of ‘creative destruction’ in the economy, they are not necessarily suggestive of broader underlying trends regarding dynamism.
Measures of market concentration – such as the four firm concentration (CR4) index or the Herfindahl–Hirschman index (HHI) – should be interpreted with a great deal of care, particularly at the aggregate level.
- Indeed, the proposition that market concentration by itself must be negatively associated with productivity growth and economic well-being has been questioned by economists for at least 50 years. ⁷ As a matter of economic theory, it is straightforward to derive examples where a higher HHI (an indicator of greater market concentration) is associated with higher – rather than lower – overall economic wellbeing. ⁸ And in practice, as our submission discusses, the link between concentration and wellbeing greatly depends on the economic context.
- In any case, at the industry level, our analysis of concentration dynamics shows that most Australian industries are not concentrated, and very few of became concentrated from 2006 to 2021. Moreover, the distribution of concentration measures across industries was relatively stable between 2006 and 2021.

Thus, the claim that the Australian economy is as a whole becoming more concentrated does not seem to hold up. Most Australian industries are not highly concentrated, and this has not changed much.
Related to this, firm mark ups – the gap between price and marginal cost – are often pointed to as indicators of market power and weak dynamism. There is some evidence that markups have been increasing in Australia.
- However, this evidence is plagued by measurement issues. And, from a policy perspective, interpreting aggregate evidence on markups is not straightforward.
- For example, if costs and prices are falling together (so that consumers are better off) but prices fall at a slower rate (so that markups rise), what is the appropriate policy response?
- Or, to take another example, in the presence of large fixed costs (due, for example, to high up front capital costs), a gap between price and marginal cost may be required simply for a business to break even. In the presence of high fixed costs, higher markups could, in principle, even be associated with lower profits.

Some have gone further and claimed that “greedflation” abounds at the aggregate level in Australia, with firms across the economy using the recent increase in inflation to ‘unfairly’ mark-up prices over costs and increase profits.
- The Commission does not agree with this claim. As our submission notes, overall, aggregate evidence does not suggest that high price margins associated with exploitation of market power have played a significant role in accentuating the higher input costs and supply constraints that precipitated the current inflationary episode.

Indeed, some may counter that the greedflation thesis seems to have been quickly overtaken by the facts.
- Australia’s annual inflation rate appears to have peaked at 7.8% and has now declined to 6%. ⁹
- Company profits declined by 13.1% in the June 2023 quarter, and fell by 11.8% over the year to June. ¹⁰
- Some might ask: if there is greedflation, why were firms apparently greedy up until recently, but have now suddenly stopped being greedy?

As discussed at our appearance before this committee earlier in the year, an inflationary environment should not give businesses new opportunities for sustained exploitation of market power – if they possess this power, they will exploit it at any time.
- And, consistent with our work on wage decoupling, our submission to this inquiry notes that stripping mining out of the corporate profits data indicates that profits have been stable as a share of total factor income. In fact, overall profits as a share of factor income declined to 30.2% in the June 2023 quarter, the lowest level since December 2021

To conclude on indicators of dynamism: while there are some indications that dynamism may be declining in Australia, it is difficult to draw specific policy implications from the data.

Advancing prosperity

However, the answer is not to sit back and declare that it is all too hard. On the contrary, there are several policy measures that the Commission believes would stack the odds in favour of greater competition and dynamism in Australia, and which would give us the best chance of meeting and overcoming our productivity challenge.

Some commentators have said that we should focus on a narrow set of policies – climate, technology and supply chains. These are obviously important, but we think the reform agenda is much broader.

In any case, it may come as a surprise to these commentators that the Commission and its predecessors have been thought-leaders in climate policy for more than three decades, with our first publication on the costs and benefits of emissions reductions appearing in 1991. ¹¹

For all the talk about supply chains, as far as I am aware, our 2021 report on Vulnerable Supply Chains ¹² remains the only rigorous, evidence-based analysis of that issue in Australia.

And of course, our annual Trade and Assistance Review ¹³ – now in its 49th year – provides up-to-date and cutting edge analysis of industry assistance and trade policy developments.

Advancing Prosperity sets out 71 policy recommendations across 29 reform directives. Our policy recommendations fall into five general areas:

Building an adaptable workforce to supply the skilled workers for Australia’s future economy.
Harnessing data, digital technology and diffusion to capture the dividend of new ideas.
Creating a more dynamic economy through fostering competition, efficiency and contestability in markets.
Lifting productivity in the non-market sector to deliver high quality services at the lowest cost.
Securing net-zero at least cost to limit the productivity impact caused by climate change.

Our report also sets out a detailed prioritisation framework and implementation roadmap for meeting and overcoming our productivity predicament.

Many of recommendations are directly or indirectly related to competition and market dynamism, particularly given the changing structure of Australia’s economy towards services. For example in a service-based economy, fit for purpose labour market regulation is key, particularly in relation to the gig economy, which can be an important source of market entry, innovation and dynamism.

For the most part, real wages and productivity move together. Finding productivity improvements leads to increases in real wages. So labour market settings need to facilitate and indeed maximise cooperation between parties and encourage innovation, reward aspiration and effort, and preserve fairness.

Shoehorning platform work into other employment categories would put at risk its productivity impacts and its benefits for gig workers. But gig workers have genuine concerns that need to be taken very seriously. Improved safety protection and access to dispute resolution are warranted.

Our migration policy settings should be viewed through a productivity lens and focus on the composition of the intake at least as much as the aggregate quantum. In this regard, we think there is great merit in moving towards a system that places a greater emphasis on employer nomination, and less of a reliance on skill lists.

Reforms to occupational licensing arrangements would also assist with the better allocation and matching of scarce labour resources across the economy.

On digital infrastructure, we think there needs to be better regional internet connectivity, as well as policies in place to ensure that there is more transparency around digital infrastructure funding decisions and evaluation of previous investments.

And the market for internet connectivity may now be sufficiently developed to allow for a more competitive method of allocating funds.

Openness to trade, investment and international migration are key drivers of market dynamism and prosperity more generally. We recommend getting rid of our remaining tariffs, and progressively removing Australia’s anti-dumping and countervailing measures, and subjecting any new measures to an economywide cost benefit test.

We should increasingly accept product standards adopted in other leading economies as ‘deemed to comply’ with Australian standards. And we could bring application fees for proposed FDI into agricultural land assets closer into line with other forms of investment.

On taxation, we recommend a suite of reforms. In addition to abolishing Australia’s remaining tariffs, we also recommend abolishing stamp duty on insurance premiums, moving towards a more system of efficient road user pricing, and moving away from taxes that discourage encourage efficient asset transfers and capital allocation, such as stamp duty on property transactions.

Related to this, our systems of business and industrial planning and zoning could be improved, with an eye towards encouraging greater geographic competition between businesses. And there is scope for state and territory governments to improve public transport pricing arrangements.

Finally, on merger policy: we conclude that overall, there does not appear to be a strong case for the implementation of a new formal authorisation regime, of the kind proposed by the former chair of the ACCC. Instead, we think there may be more value in the ACCC further considering its internal merger review processes; and for government to consider how best to avoid perverse incentives across merger clearance procedures.

Competitive Neutrality Policy

To conclude, I would like to mention one aspect of the Commission’s responsibilities that we believe warrants a close look, and which could benefit from reform: the area of Competitive Neutrality.

It has been 30 years since the Hilmer Report on National Competition Policy – which was introduced by Prime Minister Keating as an “important contribution towards furthering competition policy in Australia”. ¹⁴

A key part of the Hilmer report dealt with the principle of competitive neutrality – the proposition that state-owned enterprises and private businesses should compete on a level playing field. Competitive neutrality (CN) policy is also concerned with government businesses that may compete with each other.

It has long been recognised that favourable conditions for government enterprises in relation to their private sector counterparts can distort all kinds of economic decisions – particularly around innovation, investment and hiring, ultimately leading to suboptimal outcomes for consumers and workers.

Those artificial cost advantages can also lead to resources (capital and labour) flowing to government businesses simply because of their government ownership rather than them being the most efficient (productive) users of resources. Where these resource allocation distortions occur, the nation’s productivity suffers.

The principle of competitive neutrality is likely to become increasingly important, particularly given the growth of the non-market sector (for example, in the care economy) and the re-entry of governments into some of the economy’s “commanding heights”, such as energy and telecommunications.

The Government's approach to operationalising CN principles is set out in the 1996 Competitive Neutrality Policy Statement ¹⁵ and the Competitive Neutrality Guidelines for Managers. ¹⁶ Unfortunately, Australian Government businesses sometimes fail to comply with these obligations and guidelines.

An integral part of competitive neutrality policy and its implementation is a competitive neutrality complaints handling mechanism, which is intended to bring some discipline to the implementation of competitive neutrality and provide ongoing accountability.

The Australian Government Competitive Neutrality Complaints Office – the AGCNCO, a separate unit within the Commission – is that mechanism. It deals with any complaints and provides independent advice to Government following its investigations.

Any individual, organisation or government body with an interest in the application of competitive neutrality may lodge a complaint. While governments are not obliged to accept the AGCNCO’s advice, we think there needs to be a strong cop on the beat in relation to competitive neutrality.

However, although our competitive neutrality policy has served Australia well over the last three decades, it is deficient in several areas. To name just a few:

Australia’s competitive neutrality policy lacks a credible enforcement regime.
There is a lack of guidance on what a public interest test should embody and what it should look like.
There are poor processes to ensure compliance with the policy by start-up government businesses.
There is little guidance or principles on what constitutes ‘government’ in significant government business activities.
There is little guidance on what policy or complaints process should apply for business activities with multiple government owners.
There is no mention of the full range of possible material competitive advantages (other than those relating to tax, debt and regulatory neutrality and earning a commercial rate of return), and poor guidance on methodologies for estimating the value of some advantages.
There is an absence of guidance on whether any identified cost advantages should be addressed by the imposition of a CN adjustment payment, or by directly addressing the source of the advantage.
There is a need to reformulate the commerciality test in CN policy.

Australia recently signed up to the OECD’s Recommendation on Competitive Neutrality. ¹⁷ In light of this renewed commitment, and given this Committee’s – and the Government’s – focus on competition and dynamism, it may be an appropriate time to look more closely Australia’s competitive neutrality regime, with an eye to reform.

In this respect we support the earlier findings of the Competition Policy Review ¹⁸ (the Harper report), which recommended all Australian governments should review their competitive neutrality policies and complaint handling mechanisms to ensure they remain fit for purpose in the 21st century.

The Government’s recently announced two-year Competition Policy Review may provide a further opportunity to examine competitive neutrality policy.

References

Commonwealth of Australia (2015) Competition Policy Review, Final Report, March.

Demsetz, H (1973) The Market Concentration Doctrine: An Examination of Evidence and a Discussion of Policy, AEI-Hoover Policy Study 7, Washington DC. http://masonlec.org/site/rte_uploads/files/GAI/Readings/Economics%20Institute/Demsetz_Market%
20Concentration%20Doctrine.pdf

Industry Commission (1991) Costs and Benefits of Reducing Greenhouse Gas Emissions, Inquiry Report No. 15, November.

Productivity Commission (2021) Vulnerable Supply Chains, Study Report, Canberra.

—— (2023a) 5-year Productivity Inquiry: Advancing Prosperity, Inquiry Report no. 100, Canberra.

—— (2023b) Submission to the Inquiry into promoting economic dynamism, competition and business formation, Canberra.

—— (2023c) Trade and assistance review 2021-22, Annual report series, Canberra.

—— (2023d) Productivity growth and wages – a forensic look, PC Productivity insights, Canberra, September.

Robson, A (2011) Law and Markets, London: Palgrave Macmillan.

Footnotes

PC (2023a) Return to text
ABS Cat No. 5206.0 https://www.abs.gov.au/statistics/economy/national-accounts/australian-national-accounts-national-income-expenditure-and-product/latest-release Return to text
https://www.rba.gov.au/speeches/2023/sp-gov-2023-09-07.html Return to text
PC (2023d) Return to text
As set out in our submission, economic dynamism is concerned with “the efficient adaptation to new demand and supply trends and re-organisation of resources (labour and capital) across the economy, supported by the creation of new knowledge and its rapid diffusion.” Return to text
PC (2023b) Return to text
See Demsetz (1973) Return to text
See, for example, Robson (2011), chapter 10 Return to text
ABS Cat No. 6401.0 https://www.abs.gov.au/statistics/economy/price-indexes-and-inflation/consumer-price-index-australia/latest-release Return to text
ABS Cat No. 5676.0 https://www.abs.gov.au/statistics/economy/business-indicators/business-indicators-australia/latest-release Return to text
PC (1991) Return to text
PC (2021) Return to text
PC (2023c) Return to text
Statement by the Prime Minister the Hon PJ Keating MP, 25 August 1993. https://pmtranscripts.pmc.gov.au/sites/default/files/original/00008945.pdf Return to text
https://www.pc.gov.au/about/core-functions/competitive-neutrality/commonwealth-competitive-neutrality-policy-statement-1996.pdf Return to text
https://www.pc.gov.au/about/core-functions/competitive-neutrality/2004-competitive-neutrality-guidelines-for-managers.pdf Return to text
The Recommendation was formally adopted on 31st May 2021 at the Ministerial Council Meeting. All OECD members have adhered. https://legalinstruments.oecd.org/en/instruments/OECD-LEGAL-0462#adherents Return to text
See Commonwealth of Australia (2015). https://treasury.gov.au/sites/default/files/2019-03/Competition-policy-review-report_online.pdf. The Commonwealth undertook a review in 2017. https://consult.treasury.gov.au/competitive-neutrality-review Return to text

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